International Stock Return Predictability: What Is the Role of the United States?

  • Author(s): DAVID E. RAPACH, JACK K. STRAUSS, GUOFU ZHOU
  • Published: Jul 16, 2013
  • Pages: 1633-1662
  • DOI: 10.1111/jofi.12041

ABSTRACT

We investigate lead‐lag relationships among monthly country stock returns and identify a leading role for the United States: lagged U.S. returns significantly predict returns in numerous non‐U.S. industrialized countries, while lagged non‐U.S. returns display limited predictive ability with respect to U.S. returns. We estimate a news‐diffusion model, and the results indicate that return shocks arising in the United States are only fully reflected in equity prices outside of the United States with a lag, consistent with a gradual information diffusion explanation of the predictive power of lagged U.S. returns.

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